Service sector activity, retail sales disappoint

Further evidence that the economic recovery will be a slow and bumpy one emerged Thursday with reports that service sector activity and retail sales unexpectedly shrank in November as consumers held back on purchases.

The government did report one positive sign: New jobless claims dropped for a fifth straight week. But productivity gains in the third quarter showed that employers are managing to squeeze more work out of fewer workers. That's an ominous sign for the nearly 16 million Americans looking for jobs — and for many others who fear losing theirs.

The government is expected to report Friday that employers shed 130,000 jobs in November and that the unemployment rate will remain at 10.2 percent. Companies have been laying off fewer workers. But they have yet to ramp up hiring, and the jobless rate is expected to expected to keep climbing into next year.

The Institute for Supply Management's service sector index dropped to 48.7 from 50.6 in October. Analysts polled by Thomson Reuters had expected a level of 51.1. Any reading below 50 signals contraction. The service sector had begun growing in September for the first time in 13 months.

The ISM measure tracks more than 80 percent of the country's economic activity, including such diverse industries as health care, retail, financial services and transportation.

The trade group said employment shrank for the 22nd time in the last 23 months, albeit at a slightly slower pace. Business activity shrank again after growing for the past three months and backlogs contracted. But new orders, a sign of future growth, continued expanding and prices rose.

The ISM's service-sector gauge is closely watched because the sector includes more than 80 percent of non-farm U.S. jobs.

The report “underscores the difficult conditions facing the overwhelming majority of U.S. businesses,” said Josh Shapiro, economist at research firm MFR Inc.

Miller Tabak's Dan Greenhaus cautioned that businesses may have a tough time passing higher prices on to wary consumers, perhaps weighing on their profits. That's also not going to help companies add more jobs or boost salaries.

Stocks gave back most their earlier gains after the ISM report disappointed investors. The Dow Jones industrial average lost about 10 points in midday trading, and broader indexes were mixed.

Earlier this week, the ISM said its separate manufacturing index dipped to 53.6 in November from 55.7.

“For the moment, both indices remain at levels consistent with a continuation of the economic recovery,” Paul Dales of Capital Economics wrote in a research note. “But it is perhaps worrying that the strength of that recovery may be starting to fade so soon.”

The nation's retailers suffered last month as a modestly positive start to the holiday shopping season couldn't offset weak spending the rest of the month.

After posting two straight sales gains after more than a year of declines, merchants posted an unexpected 0.3 percent decrease for November, compared with a year ago. Last year at this time, business had plummeted to historic lows as spooked shoppers clamped down after the financial meltdown.

The four-week average of claims, which smooths out fluctuations, dropped for the 13th straight week to 481,250, about 180,000 below the peak for this recession reached this spring.

That's still above the 425,000 claims that many analysts say will signal new jobs are being created. But the ongoing decline means employers may start adding jobs within the next two months, economists said. The nation's economy has shed jobs for 22 straight months, the longest stretch since World War II.

“The surprise further drop in jobless claims … is a very encouraging sign that the U.S. economy may be closer to the point of net job creation than we had thought,” John Ryding, an economist at RDQ Economics, wrote in a research note.

The continued job cuts amid slowly growing business means employers must squeeze more out of the workers they have. The government also said productivity surged in the third quarter by the largest amount in six years, while labor costs fell.

The Labor Department revised its estimate of growth in output per hour of work to an annual rate of 8.1 percent in July-September period, the biggest jump since 2003, from an initial estimate of 9.5 percent. Unit labor costs fell at a 2.5 percent rate, less than the 5.2 percent plunge first reported.

That indicates inflation is remaining under control. But it also signals that workers' wages are being squeezed, raising doubts about the durability of the economic recovery.

President Barack Obama is holding a “jobs summit” at the White House Thursday with business and labor leaders. Tabak said he hopes the president will address measures to stimulate hiring, such as cutting the payroll tax.

“Increasing employment is everyone's responsibility, from government to businesses to households,” Obama economic adviser Larry Summers said in advance of the forum.